Hong Kong analysts get the jump on peers
Hong Kong investors who celebrated this week as the Hang Seng Index broke 20,000 are not the only ones who will look back on 2006 with fond memories. As markets here and in the mainland saw hefty returns, the equity analysts who are paid to research them also posted an impressive year.
According to data from StarMine, the San Francisco-based firm that measures analysts' performances, equity research teams in Hong Kong and China outperformed their peers in nearly every market in the world. Through to the end of November, analysts' recommendations earned returns about 3.7 percentage points above local benchmarks for the industries they covered - a performance bettered only in Australia.
That success - which comes after good years in 2004 and 2005 - is particularly impressive given that market forces tend to drive the typical analyst's performance close to the industry average, said StarMine vice-president David Lichtblau.
'When you are averaging in analysts across the world, you wouldn't expect the average to be that different from industry benchmarks,' Mr Lichtblau said. 'There are years that we've seen other regions get up there, but it is not typical.'
StarMine, which with the South China Morning Post publishes an annual ranking of analysts in the region, also found that local analysts' earnings estimates were also getting more accurate, with the average error shrinking by nearly half since the beginning of the decade.
While StarMine's data suggests that analysts in Chinese markets are earning their keep, the company doesn't explain why. A fair bit of mystery remains as to how much credit the analysts themselves deserve for their performance - and how much longer their successful run will last.
One possible explanation is that global institutions have bulked up their research teams in the region as the Chinese economy has grown. Even as they cut back on analysts in other regions, many firms have doubled or trebled their China research teams in only three or four years.
Those additional resources are pouring into the market just as analysts are under far greater pressure from clients and bosses to get their estimates right. After a series of conflict-of-interest scandals in the late 1990s, analysts worldwide are no longer supposed to grease the skids for potential investment banking deals. Instead, they are expected to attract business from hedge funds and other institutional investors by the quality of their research.
At the same time, Chinese companies have made analysts' jobs easier, placing a higher value on transparency and offering more information to analysts and investors.
'Back in the 1990s, Chinese companies listed and disappeared,' said Andrew Look, head of Hong Kong research for UBS. 'Now, they actually talk to people.'
Mr Look sees the additional resources the major houses have put into research, along with the competition that has created, as the primary reasons for analysts' recent success. But Mr Look also points to a handful of recent listings that were safe bets for growth, creating a 'one-way street' that made some analysts' job easier. And Erwin Sanft, head of China research for BNP Paribas, notes that stable exchange rates may help analysts put out more accurate estimates.
By measuring stock picks against industry benchmarks, StarMine attempts to distinguish the value added by analysts from overall market trends. But since analysts are usually biased towards 'buy' recommendations, the real test may come in a sustained downturn.
'As a research head, I do notice that the quality of work has improved,' Mr Sanft said. 'On the one hand, we like to say that of course that expertise has an impact. On the other hand, we don't want to take too much credit.'